Houston Medical Office Report YE 2013


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Houston Medical Office Report YE 2013

  1. 1. YEAR-END 2013 | MEDICAL OFFICE COLLIERS HEALTHCARE SERVICES GROUP - HOUSTON, TEXAS HEALTHCARE MARKET COMMENTARY Houston’s Medical Office Market Absorbs 662,000 SF in 2013 Houston HOUSTON MEDICAL OFFICE MARKET INDICATORS 2012 2013 CITYWIDE NET ABSORPTION (SF) 1.3M 662K CITYWIDE SF DELIVERED 1.7M 235K CITYWIDE AVERAGE VACANCY Q4 13.3% 11.7% CLASS A AVERAGE VACANCY Q4 13.6% 7.1% CITYWIDE AVERAGE RENTAL RATE Q4 $23.09 $23.19 CLASS A AVERAGE RENTAL RATE Q4 $29.33 $28.17 Houston medical office buildings recorded 662,000 SF of positive net absorption in 2013, the majority of which, 444,300 SF, occurred in the first half of the year. By property class, Class A posted the largest amount of positive net absorption in the second half of the year, followed by Class B and then Class C posting 51,184 SF and 30,106 SF, respectively. The citywide average vacancy rate decreased 20 basis points and the average quoted rental rate increased 0.9% to $23.19 per SF from $22.99 per SF in Q2 2013. Houston’s medical office market is expected to benefit from both shortand long-term regional trends. Disciplined development, with only 6 new buildings added to inventory in 12 months, will relieve the pressure in filling the existing vacant lease space. Overall, Houston’s economy remains among the strongest in the U.S. The Houston metropolitan area added 86,200 jobs between November 2012 and November 2013, an annual increase of 3.1% over the prior year’s job growth. Local economists have forecasted 2014 job growth to remain steady, adding between 68,000 and 72,000 jobs. Further, Houston’s unemployment fell to 5.6% from 5.8% one year ago. Houston area home sales increased 19.4% between November 2012 and November 2013. JOB GROWTH & UNEMPLOYMENT (Not Seasonally Adjusted) ABSORPTION, NEW SUPPLY & VACANCY RATES Absorption UNEMPLOYMENT 11/12 11/13 HOUSTON 5.8% 5.6% TEXAS 6.0% 5.8% U.S. 7.4% 6.6% ANNUAL CHANGE # OF JOBS ADDED HOUSTON 3.1% 86.2K TEXAS 2.5% 275.7K U.S. 1.7% 2.3M JOB GROWTH Accelerating success. 1,500,000 1,000,000 New Supply Vacancy 17% 15% 13% 500,000 0 11% 9% 7% (500,000) 5% 1
  2. 2. HEALTHCARE MARKET COMMENTARY | YEAR-END 2013 | COLLIERS INTERNATIONAL HOUSTON Vacancy & Availability MEDICAL OFFICE EXISTING INVENTORY BY CLASS Class A 7,340,192 27.5% Houston’s medical office market occupancy increased during the second half of 2013 with the citywide average vacancy rate decreasing by 20 basis points to 11.7% from 11.9%. Class B 14,239,726 54.9% Class C 5,186,995 17.5% By property class, Class A vacancy rates posted the largest decrease during the second half of 2013, dropping 120 basis points to 7.1% from 8.3% in Q2 2013. Class C vacancy rates decreased 40 bps to 10.4% from 10.8%, while Class B vacancy rates increased 40 basis points to 14.2% from 13.8%. Class A Class B Class C MEDICAL OFFICE NET ABSORPTION BY CLASS Class A Class B Class C 700,000 600,000 500,000 400,000 300,000 200,000 100,000 Q4-10 Q1-11 Q2-11 Q3-11 Q4-11 Q1-12 Q2-12 Q3-12 Q4-12 Q1-13 Q2-13 Q3-13 Q4-13 0 (100,000) MEDICAL OFFICE CLASS A & B VACANCY VS. RENTS Class A Vacancy Class B Vacancy Class A Rents Class B Rents 16% $35 14% Sublease space has not had a significant impact on current vacancy rates, remaining below 0.2%. Of the 3.5M SF of vacant space on the market, only 25,300 SF was sublease space. Disciplined medical office development activity has helped prevent major upheavals in current occupancy levels. There were only six (6) new buildings (235,000 SF) added to the market during 2013, most of which are low-rise professional office buildings located in the suburbs. Currently, there are six (6) medical office buildings under construction. Empire Commercial Developers has begun construction in Telfair on a 3-story, 46,000-SF medical office building with a 3-story parking garage. The project is slated for completion by July 2014. Absorption & Demand Houston’s medical office market recorded 217,857 SF of positive net absorption in the second half of 2013, bringing the year-end positive net absorption to 662,176 SF. By property class, Class A posted the largest amount of positive net absorption in the second half of 2013, with 136,567 SF, followed by Class B properties posting 51,184 SF of positive net absorption and then Class C posting 30,106 SF. Rental Rates Quoted full-service rental rates for all medical office property classes averaged $23.19 per SF in Q4 2013, an increase of 0.9% from $22.99 per SF in Q2 2013. Medical office building landlords continued to offer lease concessions including free rent to credit worthy tenants, but have decreased the amount of tenant improvement packages. By property class, on a biannual basis, the average Class A rental rate decreased from $28.42 per SF in Q2 2013 to $28.17 per SF, Class B increased to $23.16 per SF from $22.83 per SF, and the average Class C rate increased to $18.08 per SF from $17.81 per SF. $30 12% $25 10% $20 8% Q4-13 Q3-13 Q2-13 Q1-13 Q4-12 Q3-12 Q2-12 Q1-12 Q4-11 Q3-11 Q2-11 Q1-11 4% $15 Q4-10 6% $10 COLLIERS INTERNATIONAL | P.2
  3. 3. HEALTHCARE MARKET COMMENTARY | YEAR-END 2013 | COLLIERS INTERNATIONAL HOUSTON SALES TRANSACTIONS Clear Lake Rehabilitation Hospital NASA/Clear Lake Submarket RBA: Built: Buyer: Seller: Sale Date: Sale Price: 58,023 SF 1991 Health Care Property, Inc. Kindred Healthcare, Inc. September 2013 $15.2M Westwood Plaza II Southwest Beltway 8 Submarket Sales Activity Transaction activity slowed slightly between mid-year 2013 and year-end 2013, with 16 properties changing hands compared to 30. According to CoStar Comps, Houston medical building sales transactions in the second half of 2013 had a total sales volume of $36.3M. Many of the transactions were multi-property portfolio sales, however, there were several single property transactions that occurred, which are listed in the column to the left. Currently, there are 48 properties listed for sale and 1 pending transactions. Leasing Activity Houston’s medical office leasing activity reached 391,400 SF in the second half of 2013. By property class, Class B product led the market with 279,600 SF leased, followed by Class A at 74,100 SF, then Class C at 37,700 SF. Although the majority of new leases signed in the second half of the year were in the 1,000 5,000 SF range, there were a few larger lease transactions. DaVita HealthCare Partners, Inc. leased 15,180 SF in the Bayshore Medical Building located at 333 Bayshore Blvd. in Pasadena, TX. UT Physicians leased 14,048 SF in the Plaza Medical Center located on Binz St in the South Main/Medical Center submarket. Additional transactions under 5,000 SF include: Medwin Family Medicine Rehab’s lease of 4,340 SF at 1235 Lake Pointe Pwy. in the Fort Bend/Sugar Land submarket and Methodist Primary Care Group leased 3,737 SF at 4710 Bellaire Blvd. in the Bellaire submarket. RBA: Built: Buyer: 214,073 SF 1982/1998 Mental Health & Mental Retardation Authority Seller: MidFirst Bank Sale Date: December 2013 Sale Price: $9.5M 8340 Coffee St South Submarket RBA: Built: Buyer: Seller: Sale Date: List Price: Cap Rate: 10,500 SF 2006 Areteaus Realty Trust, LP Jaffe Dialysis, LLC November 2013 $5.7M 8.2% Source: Costar Group; Real Capital Analytics COLLIERS INTERNATIONAL | P.3
  4. 4. HEALTHCARE MARKET COMMENTARY | YEAR-END 2013 | COLLIERS INTERNATIONAL HOUSTON TEXAS MEDICAL CENTER The Texas Medical Center (TMC) – the world’s largest medical center – represents one of Houston’s major economic drivers and core industries with an estimated regional annual economic impact of $15 billion. TMC is also one of Houston’s largest employers with 106,000 employees, including physicians, scientists, researchers and other advanced degree professionals in the life sciences. The internationally-renowned, 1,345-acre TMC is the world’s largest medical complex with 54 member institutions, including leading medical, academic and research institutions, all of which are non-profit and dedicated to the highest standards of research, education and patient and preventive care. Over 70,000 students – including more than 20,000 international students – are affiliated with TMC, including high school, college and health profession graduate programs. More than 7.2 million patients visited in 2012, including approximately 16,000 international patient visits. In addition to the medical facilities and institutions of higher learning, TMC is also home to more than 290 professional buildings. Overall, the complex covers over 18 miles of public and private streets and roadways, with 45.8M SF of existing patient, education, and research space. TMC has continued to grow and expand over the past several decades with the majority of growth occurring in the past ten years. The Center is located in the 110-acre University of Texas Research Park, a joint effort between the University of Texas Health Science Center, M.D. Anderson and General Electric Healthcare. TMC spent $7.1 billion in building and infrastructure investments between 2008 and 2012, and spent over $3.4 billion on research and over $960 million on charity care in 2012. The University of Texas M.D. Anderson Cancer Center in the Texas Medical Center, ranked #1 in U.S. News & World Reports “Americas Best Hospitals 2013” for cancer care. TMC Patient Care Institutions TMC Academic and Research Institutions DePelchin Children’s Center Sabin Vaccine Institute The Menninger Clinic The University of Houston – Victoria School of Nursing The University of Texas M.D. Anderson Cancer Center Texas Children’s Hospital Neurological Research Institute Texas Children’s Hospital Baylor College of Medicine Memorial Hermann Hospital System The University of Texas Health Science Center at Houston The Methodist Hospital The University of Texas M.D. Anderson Cancer Center St. Luke’s Episcopal Hospital University of Houston College of Pharmacy Lyndon B. Johnson General Hospital Rice University Quentin Mease Community Hospital Texas A&M University Health Science Center Ben Taub General Hospital Prairie View A&M University College of Nursing The Institute for Rehabilitation and Research Texas Woman’s University Institute of Health Sciences The Hospice at the Texas Medical Center Texas Southern University College of Pharmacy and Health Sciences Texas Heart Institute Shriners Hospitals for Children – Houston Veterans Affairs Medical Center in Houston Harris County Psychiatric Center Houston Academy of Medicine COLLIERS INTERNATIONAL | P.4
  5. 5. HEALTHCARE MARKET COMMENTARY | YEAR-END 2013 | COLLIERS INTERNATIONAL HOUSTON HOUSTON AREA HOSPITAL LOCATIONS Houston MSA Health Care 115 Hospitals 19,830 Hospital Beds 13,360 Physicians 299,600 Health Care & Social Assistance jobs 3.5% annual employment growth TEXAS MEDICAL CENTER MAP Texas Medical Center World’s Largest Medical Complex (1,300 Acres) 54 Member Institutions 7.2M Patients in 2012 106,000 Employees 5,000 Physicians 49,000 Life Science Students $960 million in Charity Care COLLIERS INTERNATIONAL | P.5
  6. 6. HEALTHCARE MARKET COMMENTARY | YEAR-END 2013 | COLLIERS INTERNATIONAL HOUSTON The Colliers Advantage Enterprising Culture Colliers International is a leader in global real estate services, defined by our spirit of enterprise. Through a culture of service excellence and a shared sense of initiative, we integrate the resources of real estate specialists worldwide to accelerate the success of our partners. When you choose to work with Colliers, you choose to work with the best. In addition to being highly skilled experts in their field, our people are passionate about what they do. And they know we are invested in their success just as much as we are in our clients’ success. This is evident throughout our platform—from Colliers University, our proprietary education and professional development platform, to our client engagement strategy that encourages cross-functional service integration, to our culture of caring. We connect through a shared set of values that shape a collaborative environment throughout our organization that is unsurpassed in the industry. That’s why we attract top recruits and have one of the highest retention rates in the industry. Colliers International has also been recognized as one of the “best places to work” by top business organizations in many of our markets across the globe. Colliers International offers a comprehensive portfolio of real estate services to occupiers, owners and investors on a local, regional, national and international basis. LISA R. BRIDGES Director of Market Research | Houston Direct +1 713 830 2125 Fax +1 713 830 2118 lisa.bridges@colliers.com COLLIERS INTERNATIONAL 1233 W. Loop South Suite 900 Houston, Texas 77027 Main +1 713 222 2111 Accelerating success. COLLIERS INTERNATIONAL | P.6